Fed quietly opens the final chapter of its crisis-era bonds policy

NEW YORK (Reuters) - The Federal Reserve, the world's largest holder of U.S. debt, announced on Wednesday it was edging back from the market and investors barely budged.

There were no tectonic shifts in stock, bond or currency markets after the U.S. central bank said not only that it would begin trimming its $4.5-trillion portfolio of assets next month, but that it was sticking with plans to hike interest rates this year despite the markets' skepticism.

Months of telegraphing by the central bank allowed for the muted market response seen on Wednesday. Yet the Fed's decision to begin winding down one of its most controversial policies of the crisis era, which attracted sharp criticism from congressional conservatives and economic purists over the last decade, amounted to a bold bet on the U.S. economy's prospects.

The Fed, under Chair Janet Yellen, has set its own pace and agenda. Under Yellen, who took office in 2014, it has raised interest rates four times from near-zero, ended its bond buying program, and now set a path to reducing its huge holdings.

"The Fed's balance sheet will finally be turning a corner," said Brian Jacobsen, senior investment strategist at Wells Fargo (NYSE:WFC) Asset Management in Menomonee Falls, Wisconsin. In New York, JPMorgan (NYSE:JPM) chief U.S. economist Michael Feroli called it an "historic move."

(For a full interactive graphic of the effects of Fed bond-buying on the economy and markets, see: http://tmsnrt.rs/2jxgbbf)

In late 2015 the central bank hiked rates for the first time since the 2007-2009 financial crisis and recession. It has followed up with three more policy tightenings over the last 10 months.

Its cautious confidence reflected steady economic growth in the face of bouts of overseas weakness, and a U.S. unemployment rate whose drop has been nearly uninterrupted over the last seven years to 4.4 percent last month.

Over the last decade, the Fed headed into unknown policy terrain as it snapped up some $3.6 trillion in mortgage and Treasury bonds in an effort to spur riskier investing and economic growth. In response financial markets sizzled, with equities logging a string of records and bond yields dipping lower than ever before.

But as direct results of the bond buying were harder to find in the real economy, critics grew louder. They warned that the Fed, in stimulating the housing sector, had overstepped its remit and that it was inflating dangerous asset bubbles that could cause the next crisis.

Yet Yellen and her predecessor, Ben Bernanke, have largely brushed off those concerns with a gradual and sometimes halting march to a more normal policy stance.

Based on its Wednesday announcement, the central bank expects to raise rates one more time this year, three times in 2018, and a gradual reduction in bonds that shrinks its portfolio down to $3 trillion by 2021.

In response, futures traders raised the odds of a December rate hike to 72 percent from 52 percent earlier in the day, while a Reuters poll found that Wall Street's top banks also backed that timeline. U.S. stock market indexes, meanwhile, closed the day mostly flat.

"Markets will have to get accustomed to the fact that the Fed actually sees through its rate-hike plans in the face of market expectations which signaled otherwise," Commerzbank (DE:CBKG) economists wrote in a note.

"Thus, unless there is a new economic shock, market expectations will have to adjust to the Fed's thinking."

(For a graphic on the legacy of the QE era, click http://fingfx.thomsonreuters.com/gfx/rngs/USA-FED/010050VD1YM/index.html)

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:

Enrichthe conversation

Stay focused and on track. Only post material that’s relevant to the topic being discussed.

Be respectful. Even negative opinions can be framed positively and diplomatically.

Use standard writing style. Include punctuation and upper and lower cases.

NOTE: Spam and/or promotional messages and links within a comment will be removed

Avoid profanity, slander or personal attacks directed at an author or another user.

Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.

Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

I have read Investing.com's comments guidelines and agree to the terms described.

Disclaimer:Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.